When you receive your salary, you might have noticed that the amount credited in your bank account is less than your total salary package. This is because your employer deducts TDS (Tax Deducted at Source) before paying you.
Many salaried employees feel confused about how TDS is calculated, which deductions are allowed, and how to check if TDS is correctly deposited. Let’s understand TDS on Salary in a simple, step-by-step manner.
Table of Contents
What is TDS on Salary?
TDS on Salary means your employer deducts a certain amount of income tax from your monthly salary and deposits it directly with the government.
- This is as per Section 192 of the Income Tax Act, 1961.
- The tax is deducted based on your estimated annual income and applicable tax slab rates for that financial year.
In short: TDS ensures that your tax is paid in advance, instead of waiting till the end of the year.
Who deducts TDS on Salary?
- Your employer is responsible for deducting TDS.
- TDS is deducted only if your annual income is taxable (above the basic exemption limit).
- If your salary is below the taxable limit, then no TDS will be deducted.
Step by Step Process of TDS on Salary
Step 1: Estimate Annual Salary Income
Your employer calculates your gross annual salary including:
- Basic Salary
- Dearness Allowance (DA)
- House Rent Allowance (HRA)
- Special Allowances
- Bonus, Commission, Incentives, etc.
Step 2: Add Other Income (if declared)
If you declare additional income (like rent income, bank interest, freelance income), the employer may also consider it while calculating TDS.
Step 3: Deduct Allowances and Exemptions
Certain allowances are exempt from tax:
- HRA (under Section 10(13A))
- Leave Travel Allowance (LTA)
- Meal/Conveyance Allowance (subject to limits)
Employer reduces these exemptions from your gross salary.
Step 4: Deduct Deductions (Chapter VI-A)
You can claim deductions by submitting proofs:
- Section 80C: LIC, PPF, ELSS, EPF, Tuition fees (Max ₹1.5 lakh)
- Section 80D: Medical Insurance Premium
- Section 80E: Education Loan Interest
- Section 80G: Donations to charities
- NPS under Section 80CCD(1B): Extra ₹50,000 deduction
Step 5: Calculate Taxable Income
Formula:
Taxable Salary = Gross Salary – Exemptions – Deductions
Step 6: Apply Income Tax Slabs
For FY 2025-26 (New Tax Regime – Default):
- Up to ₹3 lakh → Nil
- ₹3 lakh – ₹7 lakh → 5%
- ₹7 lakh – ₹10 lakh → 10%
- ₹10 lakh – ₹12 lakh → 15%
- ₹12 lakh – ₹15 lakh → 20%
- Above ₹15 lakh → 30%
(Plus 4% Health and Education Cess)
Step 7: Divide Tax Liability Monthly
The final tax payable is divided by 12 months, and deducted every month as TDS.
Example:
- Taxable Income = ₹9,00,000
- Tax Liability = ₹60,000 (approx)
- Monthly TDS = ₹60,000 ÷ 12 = ₹5,000 per month
How to Check if TDS is Correctly Deducted?
- Form 16 – Issued by employer after year-end, showing salary and TDS details.
- Form 26AS – Available on the Income Tax portal, shows TDS deposited against your PAN.
- AIS (Annual Information Statement) – Latest statement of all income and taxes.
Key Points to Remember
- Submit investment proofs (80C, 80D, etc.) on time to avoid excess TDS.
- If you switch jobs in a year, provide Form 12B from your old employer to the new one, so TDS is calculated correctly.
- If excess TDS is deducted, you can claim refund while filing ITR.
- If less TDS is deducted, you may have to pay advance tax.
Real-Life Example
Suppose Mr. Raj earns ₹10 lakh annual salary.
- HRA exemption: ₹1.2 lakh
- 80C investments: ₹1.5 lakh
- Health Insurance: ₹20,000 (80D)
Taxable Salary = 10,00,000 – 1,20,000 – 1,50,000 – 20,000 = ₹7,10,000
Tax Calculation (New Regime):
- ₹0–3L → Nil
- ₹3–7L → 5% of ₹4L = ₹20,000
- Remaining ₹10,000 → 10% = ₹1,000
- Total = ₹21,000 + 4% cess = ₹21,840
Monthly TDS = ₹1,820 approx.
Conclusion
TDS on Salary is nothing to fear – it is just a system to ensure tax is collected in advance. The key is to plan your investments, submit proofs to your employer, and check Form 16 and 26AS regularly.
If you manage your deductions wisely, you can reduce your TDS and increase your in-hand salary. If you have any problem in tds filling and other taxation related services, contact taxgiveindia.com.